Streamed: Tuesday March 8, 2022
Duration: 13 minutes
About This Webinar
Learn more about recent legislation governing state and local tax workarounds with this webinar from Moskowitz LLP
Welcome everybody, thanks for joining us. Today, we’re going to be talking about SALT, State and Local taxes and the important part is there’s a major workaround that can save your taxes. Now in the states that have state income taxes, about half of them have adopted what California adopted. So we’re going to be talking about California today, AB 150 and its modification at SB 113, but if you are in a state other than California, the taxes at “Don’t Touch That Dial” because those states have the workarounds as well. Now you say well, wait a minute, this is a state workaround to get around a federal restriction. What’s the federal restriction? Prior to the Tax Cuts and Jobs Act on your federal return, you could deduct in unlimited amount, the state taxes that you paid on the federal return, then the Tax Cuts and Jobs Act came along and limited us to just $10,000.
So he paid a million dollars in state income taxes, your max deduction was just $10,000. Here in California and again a lot of other states, we have a workaround. The workaround is AB 150 as improved by SB 113, which affectively lets you deduct it in a certain manner and that’s what we’re going to talk about. So what happens is, this does not apply to individuals and you say, oh no, but it’s primarily businesses. But what if you’re a business that’s a sole proprietorship? A lot of small businesses are sole proprietorship. That won’t work either, but there’s an easy workaround. You become an S corporation, not a C corporation, an S corporation or a partnership or LLC a pass-through entity. And what happens with us, is this affectively lets you take a deduction. So what happens is with the S-corp, the S-corp doesn’t pay any taxes but instead passes everything through to the owners.
What happens here is, you make an election to pay the state income taxes at the state level. And then when your K-1 is performed and for those of you that are not familiar with it, a K-1 is to a business. Pretty much what a W-2 is to an employee. And you are lessening the amount of your income on the K-1 by your state income taxes paid. So affectively, it’s like you’re deducting your state income taxes on the federal return and you say, well, wait a minute, how’s the IRS like that? Because you have some state making some law that’s getting around the federal law. The IRS has approved this, has agreed to this, but bear in mind, there’s a different administration in now under the current administration, the IRS has approved this. Remember that this federal law was under the prior administration.
So this is something you have to elect, you have to ask for. And it’s a tremendous benefit because you’re paying the state taxes anyway, this gives you the opportunity to affectively deduct them on your federal return when that had been taken away from you in the Tax Cuts and Jobs Act, but for the first $10,000. And on that happy note, I’d like to introduce my friend and colleague, the head of our tax department, Tax Attorney and accountant, Cliff Capdevielle. Cliff, take it away for us please.
All righty, so the AB 150, it was enacted in 2021. And what makes it a little challenging this year is, we have had a very little time to explain this to clients and make sure that they comply with the requirements but, potentially for those clients who paid their state income tax through the pass-through entity on or before March 15th to those clients who were eligible for a tax credit which effectively allows them to get around the $10,000 limit of the federal deduction for state income taxes.
So this is available through 2025. Why is it attractive? Well, recently the state of California fixed the problem with the AMT limitation and entities with partnership owners or… Well, we lost the slides, Liz. Hello? And entities can now pay on behalf of Single-Member LLCs. We’re going to explain how that works. So for qualified entities, those are pass-through entities S-Corps, LLCs and partnerships, it gives them potentially a credit on their state, K-1s and a deduction on the federal K-1 and the advantage of course is that, that credit will make up for that lost deduction on Schedule A of their 1040.
Cliff. What about if a small business owner comes in and says, “Oh no, I’m a C-Corp it doesn’t qualify?” What am I to do?
So qualified entities are S-Corps not C-Corps, but C-Corp has the option to convert to an S-Corp to take advantage of this very valuable tax credit. And so we…
But Cliff, so does that mean that every C-Corp should automatically convert? Or is there some we have to look out for first?
We will absolutely do the analysis and let you know the pros and cons of converting from a C-corp to an S-corp and in addition to the tax credit available through this all tax workaround, there are a number of other benefits potentially for businesses who want to convert or considering converting from a C-corp to an S-corp. We’ll discuss that with you in our consultation. And so, how do you make this decision for the most part? We’re going to look at the benefits of the AB 150 SALT tax workaround and help you decide how to proceed. The threshold questions whether or not you have net income, because this credit is equal to 9.3% of the net income.
So if you’ve got a startup business and you’re not making any money, or if you are a real estate investor and you have depreciation or other deductions that are zeroing out your income every year, there’s no benefit, but you don’t want to leave any money on the table. So we will meet with you, we’ll look at your net income for the year projected, net income for 2022 and help you decide if this is an election that you want to make. Importantly for 2022, that first half of that SALT tax workaround payment is due in June, so we do want to meet with you sooner rather than later to see if this credit makes sense for you.
And I think what our audience should really focus on for a second is, this allows you a tax deduction where the most recent tax law took it away from you. The bottom line is this is not something where you have to invest something to deduct it or get a credit. This is giving you back a tax deduction that was taken away from most of us in a Tax Cuts and Jobs Act. That’s why it’s so vitally important.
And we’re going to look at all of your potential tax savings when you meet with us for a tax strategy session. So in addition to AB 150, we’re also going to look at your choice of entity. Have you designed your entities in a way that maximizes your tax savings? We’re going to look at all of your other potential credits and deductions available. Not just through the state of California, but federal deductions as well and that’s all part of our initial consultation.
Yes, and I think what our audience should understand and it’s so important, is when we go ahead and do a webinar, we talk about a subject on the webinar. But when we actually meet with you, it’s not just okay, we’re going to talk to you about that subject. There’s a variety of things and there’s so much to tax law and there’s so many benefits and that’s why you see the Fortune 500 and wealthy people making billions of dollars and legally not paying taxes on it. We put all these things together for you. You can do this, you can also do this and this and this. That is why it’s so important to have that consultation. It’s not just focusing on one thing. It’s focusing on all the benefits that you can use to save you all these taxes.
Yeah, that’s right. So Steve, you recommend for every client that they do, not only Year-End Planning, but Year-Round Planning. It makes a huge difference. We see this over and over where small businesses and investors are leaving a lot of money on the table just because they feel like they don’t have the time or expertise to dig into these issues or really spending a couple of hours with us. It can be in person or on the phone or on a Zoom call. We can save a tremendous amount of money and we see time and time again and that’s why tax planning is so important.
Absolutely, and I believe in that my whole career and that’s why I became a Tax Attorney. I was already a practicing CPA at first, but I didn’t want to just move the numbers from one place to the other, I want to say, look, you can do this and this and this and take advantage of all these laws. Remember there’s two purposes to the tax law. One, is to get tax out of all the taxpayers but the other one is a system of incentives because in a democracy, the government can’t order us to do things that are good for the government. So how these guys do it, they give us tax incentives and we want to take full advantage of those and there so very many of them. If you’d like to talk with Cliff or myself or other members of our firm, give us a call at eight, eight, eight, tax deal. That’s eight, eight, eight T-A-X D-E-A-L. Eight, eight, eight, tax deal, or MoskowitzLLP.com. M-O-S-K-O-W-I-T-Z LLP.com. Thanks, and we look forward to seeing you next time.